Heartbreak and Hardship -- Finding a Way Out for Fragile States

War-torn Iraq, quake-ravaged Haiti, conflict-devastated Sierra Leone. So many countries around the world face the legacy of terrible hardships that have left them scarred and fragile.

Everyone agrees that countries need help to recover from these situations. But it is not easy to come to a shared understanding on what this really takes.

Some have questioned whether the IMF has a meaningful role to play. They argue that engagement in fragile states--countries with weak institutions and infrastructure, internal conflict, and governments that face difficulties delivering core services to the population--should mainly be left to bilateral donors and development institutions.

And they couldn't be more wrong. Helping a country's economy to work better--the IMF's core expertise--is a central building block to move beyond fragile situations and achieve better lives for its citizens.

Doing it better

A recent review found that the IMF has played an important positive role in fragile states, principally through the programs we support, technical assistance, and training. This has helped strengthen macroeconomic policies and build institutional capacity.

This doesn't mean we always got it right. We can do better. There is plenty of scope to adapt how we engage, moving toward a more graduated, flexible, and longer view approach that is better suited to the needs of these countries.

Thankfully, we are not alone in this endeavor. The OECD, the World Bank, regional development banks, bilateral donors, and the g7+ group of countries experiencing conflict and fragility have produced deep analysis of the complexity of fragile and conflict-affected situations. They continue to develop recommendations on how the international community can work more efficiently in these instances.

More flexibility

So, how can the IMF be more flexible? And how can it deepen cooperation with other partners? We have a few ideas on the table.

Promoting macroeconomic stability is a top priority. But, these countries face severe capacity constraints, so we need to be realistic about the timeframes for taking policy actions. This calls for flexibility in designing economic programs supported by the IMF and, as emphasized by top experts, strict prioritization.

The international community is keenly aware of the need for "quick wins" when engaging in fragile situations to foster buy-in from the local population for the transition out of fragility. The IMF can strive to incorporate "quick wins" identified by others--such as restoration of electricity services or jobs programs for unemployed youth--into sustainable medium-term macroeconomic policies.

Fuller use of the IMF's Rapid Credit Facility (RCF)--a low conditionality, low access facility--could allow for more gradual adjustment during the critical initial stages of transition in low-income countries. This could help ease the burden of adjustment in line with capacity. Subsequently, as progress is made, support would be provide through the IMF's Extended Credit Facility (ECF), which allow higher financing with tighter conditionality standards. To facilitate such an approach, adapting some modalities of the RCF, such as financing limits, could be considered further.

The long-term financing needs of countries in fragile situations are best served by highly concessional donor resources. Even then, the IMF could seek to stimulate further support from donors from countries in fragile situations. For instance, we could promote inclusion of budget support windows in multi-donor trust funds (managed by others), with a link to IMF-supported programs or IMF monitoring.

Technical assistance and training in fragile situations is also crucial to success. In partnership with development agencies, the IMF is seeking ways to offer more on-site expertise to assist country officials with day-to-day policy implementation.

Fragile situations are not the exclusive domain of low income countries. We need to also consider the needs of fragile middle income countries. While these countries may have higher financial resources and higher technical capacity than their low-income counterparts, many still face a complex and risk-laden path out of fragility. Creating an RCF-like facility--limited conditionality, low financing--could well be useful to boost early IMF engagement with some of these countries and, thus, help speed up the response of the whole international community.

Continuing the conversation

In the months ahead, we will refine the above ideas and develop guidance to embed in our operations greater flexibility of IMF engagement. As this work proceeds, we can greatly benefit from further discussions with the wider IMF membership, development partners, and civil society. The next major opportunity to continue this dialogue will be at a high-level public seminar in Washington later this month in the margins of the IMF's Annual Meetings.

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The public seminar, Fostering Engagement with Fragile States, will be held on Thursday, September 22, 2011 from 10 a.m. to 11:30 a.m. at IMF Headquarters in Washington DC. Proceedings of the seminar will be available after the event on the IMF's website. For more information about the event, please refer to the 2011 Annual Meetings Program of Seminars website: http://www.worldbank.org/pos/.